By Ritvik Carvalho
LONDON (Reuters) – Global stock markets fell and safe havens such as bonds and the Japanese yen gained on Friday, as investors awaited Washington’s response to China tightening control over the city of Hong Kong.
China’s parliament on Thursday pressed ahead with national security legislation for the city, raising fears over the future of its freedoms and its function as a finance hub.
U.S. President Donald Trump said he would hold a news conference on China later on Friday. Trepidation about a further deterioration in Sino-U.S. relations put investors on edge.
European stocks sank, with the pan-European STOXX 600 index <.STOXX> down 0.83% by midday in London. Germany’s DAX <.GDAXI> fell 1%, Britain’s FTSE 100 by 1% <.FTSE> and France’s CAC 40 by 0.65%. [.EU] Futures for the S&P 500 <ESc1> slipped 0.3%. [.N]
MSCI’s broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was flat. Japan’s Nikkei <.N225> retreated from a three-month high and the yen rose to a two-week high of 107.06 against the dollar. Bonds rose.
“The question is how far Trump will go at today’s press conference, as removing Hong Kong’s favoured status would probably spark negative market developments, hitting global risk sentiment, which could backfire on the U.S. economy as it would further deteriorate the relationship with China,” strategists at Danske Bank said in a note to clients.
Trump offered a muted response to Hong Kong’s mass democracy protests last year while pursuing a trade deal with China. But ties with Beijing have since soured considerably through the COVID-19 pandemic.
Hong Kong’s government warned on Friday that withdrawing its special U.S. status, which has underpinned it as a finance hub, could be a “double-edged sword” and urged the United States to stop interfering in its internal affairs.
The Chinese yuan <CNY=> weakened in offshore trade. [CNY/]
Hong Kong’s Hang Seng index <.HSI> was 0.8% lower and has lost about 3% in the two weeks since news of China’s security legislation broke. [.HK]
In bond markets, yields on benchmark 10-year U.S. Treasuries <US10YT=RR> fell to 0.6705%, more than 100 basis points below where they began 2020.
MAY MARCHES ON
Despite the gathering tension and the near-daily release of grim economic data, enormous global stimulus seems to have propped up stocks. The S&P 500 <.SPX> is up 4% for the month and on track for its best May since 2009.
A rally in the risk-sensitive Aussie dollar <AUD=D3> is slowing, but the currency has gained nearly 2% for the month and sits 20% above March lows.
MSCI’s All Country World Index <.MIWD00000PUS>, which tracks stocks across 49 countries, is on track for a 3.5% gain this week – its best weekly performance since April. The index was down 0.1% on the day.
The optimism stems from signs of progress in the world economy. The number of Americans seeking jobless benefits fell for an eighth straight week last week and New York has outlined plans for re-opening.
“As we have said about the re-opening and ensuing recovery, this is a process,” said RBC Capital Markets’ chief U.S. economist, Tom Porcelli. “And right now the process is moving along in the right direction.”
The euro <EUR=> was headed for its best month since December as the European Union’s 750 billion-euro coronavirus recovery fund fuelled optimism about the EU’s political future. [FRX/] It hit a two-month high of $1.1114 and last traded at $1.1106.
The dollar sank against a basket of currencies, down 0.4%. <=USD>
Gold rose 0.5% to trade at $1,727.32 an ounce. [GOL/]
In oil, Brent crude <LCOc1> fell 2.78% to $34.31 a barrel. U.S. crude <Clc1> fell 3.3% to $32.59 a barrel. [O/R]
Both contracts are headed for their biggest monthly gains in years as production cuts and optimism about demand recovery led by China supported prices.
London aluminium prices, which stayed flat on Friday, were set for their strongest monthly gain since January 2019, underpinned by a solid recovery in demand from top consumer China. [MET/L]
(Reporting by Ritvik Carvalho, additional reporting by Tom Westbrook in Singapore; Editing by Larry King and Alison Williams)